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Aifa warns FSCS threshold hike will wipe out 40% of adviser profits

Chris Hannant 480

The FSA’s plan to hike the annual Financial Services Compensation Scheme levy threshold for investment advisers will wipe out 40 per cent of firms’ profits, according to Aifa.

The FSA published an FSCS funding consultation in July which outlined plans to hike the claims threshold from £100m to £150m. The threshold represents the maximum that investment advisers can pay in a year towards the FSCS levy, with any overspill passed to other firms.

Aifa says the weak economy, the impact of the RDR and falling adviser numbers will hit firms’ revenues next year, meaning the FSCS levy will take up a greater share of their profits.

Research by the trade body shows 76 per cent of firms expect the RDR to cause their revenues to fall. Aifa says the average fall might be up to 20 per cent, but a conservative estimate is 10 per cent.

It calculates that a 10 per cent revenue drop would see the current £100m FSCS levy take up 25 per cent of firms’ profits. It says this would rise to 40 per cent if the levy is raised to £150m.

Aifa says under the FSA’s assumptions, the proposed higher threshold of £150m would represent approximately 25 per cent of firms’ profits.

Aifa policy director Chris Hannant says: “The FSA’s own assumptions about what is affordable seem quite shaky.

“We believe the estimates rely on the threshold being affordable only if RDR has no impact on revenue and we find that totally implausible.”

An FSA spokeswoman refused to comment on Aifa’s findings, but says the regulator asked Deloitte to take into account the impact of the RDR when it conducted its research on behalf of the FSA.

Deloitte modelled three scenarios about what was affordable for investment advisers to pay, based on a pessimistic scenario, a middle base case scenario representing a similar year to 2010/11 in terms of outlook for the economy and the financial services sector, and an optimistic scenario.

Aifa says the pessimistic one assumed a 20 per cent drop in revenues, but the FSA then chose to base what the sector could afford on their middle case scenario, which assumed there would be no drop in revenue because of the RDR. Hannant says: “That is the assumption we think is implausible.”

Speaking at the launch of the FCA’s approach document this week, chief executive designate Martin Wheatley admitted plans to reform the FSCS have met with fierce industry opposition and said the scheme’s fairness needs to be “looked at very carefully.”

Hannant says: “There are always opportunities for advisers to make their case about FSCS reform but it obviously makes it easier if the decision-makers have a more open mind. This shows this is an issue the FSA is actually prepared to consult on.”

Yellowtail Financial Planning managing director Dennis Hall says: “Advisers cannot wait for the regulator to look at the FSCS, we need to act now to ensure these problems are dealt with.”

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Comments

There are 17 comments at the moment, we would love to hear your opinion too.

  1. Job done!

    isn’s the sole aim of the FSCS and FSA to totally destroy our profits?

    That way, more of us will go out of business, leaving the nationals and banks. How easy would that be for them regulate???

  2. Neil F Liversidge 18th October 2012 at 8:56 am

    I started work at 05.40 this morning. From talking to friends in the industry it seems we’re all pretty much working for nothing these days, sorting out all the new bumf that goes with RDR instead of doing what we’re supposed to be doing – working for clients and running a busienss. And now we are to pay yet more to FSCS for the benefit mostly of fraudsters with selective memories and the claim fabricators who facilitate their dishonesty. Nice.

  3. And of course the FSA is entirely blameless whilst overseeing fraud, theft and dishonesty and doing nothing about it for months other than trying to blame these events a mis-selling event – ask a Connaught Income Fund investor.

    Well done everyone.

  4. I may be wrong, but I thought the proposal was to hike the claim threshold not from £100m to £150m but from £100,000 to £150,000. Is this a typo?

    And what’s happening about calls for a product levy to replace the present system? Or the manifest injustice of the FSA twisting round the failures of providers such as LifeMark and ArchCru to be the responsibility of intermediaries? If these things don’t constitute a calculated and concerted strategy to obliterate the IFA community, one shudders to think what might.

    Is it any wonder that IFA’s left, right and centre are throwing in the towel in favour of other ways of making an honest living?

  5. It really does look like the FSA and FSCS want to get rid of as many advisers as they can. To keep saying RDR etc is going to be good for consumers is as we all know absolute rubbish. Clients are already refusing to pay fees or adviser charging. In this climate people should be abe to choose the way they pay be it either commission or fees not be told by an unelcted quango. Advisers will be forced to leave even if they dont want to with all these charges increase

  6. ‘Deloitte’….and I wonder how much the FSA (we) paid for that report?….Another misguided report with no handle on reality…..smaller no’s of firms, fewer firms to draw their fees from, increased costs….we’ll see how many are left in business in a few years time!
    And let’s not even think of the millions of clients who will no longer benefit from good advice…..

  7. Where do I start ?

    I have seen my regulation ( FSA, Levy’s MAS FSCS) costs increase by over 35% over the past year or so, and dont even get me started on my PI going up by over 80%.

    Profit is a thing of the past already, for me and probably most IFA practices.

    AIFA can “warn” all they like, may I suggest something a little stonger.

  8. We have thrown in the towel this month for Investment business and will instead focus on protection. As a firm without a large high net worth client bank we forecast a 40% reduction in revenues matched with a 40% increase in fees. Enough is enough and it is a pleasure to unsubscribe to all the RDR junk mail. Unfortunatly those good IFA,s that do continue will be lumbered with the shortfall made by the likes of me who no longer want to be seen as a cash cow to pay for the mistakes of others an have left the “advice” business

  9. One more burden lord, will we ever be allowed to trade for profit, which after all is the sole purpose of running a business, provide service for a cost to the consumer.

    A product levy much like IPT, would have been a fairer way of funding the FSCS, but then that might have reduced the level of staff they need to implement their bizarre processes.

    I wonder how many iFA firms will actually survive post RDR and prosper sufficiently well to pay all these extra costs.

    If we were actually employed and had a union, none of this rubbish would be allowed to see the light of day, but most of us choose to run our own lives, our own businesses and that is how they have us trapped in their cycle of deceit and anxiety.

    Martin Wheatley in a recent MM article has stated his is distancing himself from Mr Sants “Be afraid” line.

    He won’t need to do that, there won’t be enough of us left after the next two years have passed to cause him any concern.

  10. Anon at 8.42 seems to have been living on the moon over the last year.

    The banks? Networks & nationals? They’ve all been going to the wall or throwing in the towel.

    The FSCS is a real danger to IFAs for sure, but RDR killed off the banks “financial advisers”.

  11. I wonder if our so called govrnment who seem to be toothless when dealing with the FSA realise just hw many people will be unemployed when RDR bites. It will not be just IFA’s but back office staff, paraplanners,secretataries etc. They will probably realise when they find that the votes cast at the next general election go a very different way to what they want. A toothless Parliament is no good to any one

  12. The FSA seem hell bent on creating a non-advice system in the UK. Soon the general public will be unable to afford to take advice, so will have to make the buying decisions themselves. Maybe this is the long term plan of the FSA after all, as without advice the public would have no-one to sue if they make a mistake in their choice of investment product, insurance etc. This would starve the claims companies of targets to sue, and reduce the strain on the FSCS. Job done!

  13. Nicholas Pleasure 18th October 2012 at 11:49 am

    I think we are ignoring a couple of major factors that make this news even worse than it initially seems.

    The banks have thrown in the towel and several major networks have disappeared. These firms paid thousands, maybe millions towards the compensation scheme. They’ve gone and their share will be given to those of us that remain.

    What options are left to us. Very few I believe. We cannot refuse to pay because our permissions would be removed so I propose the following.

    In 2013 I plan to go on holiday for a whole year. I will see no clients at all. I will collect the trail commission due because under the mad rule I can do that providing I provide no advice. My business will provide a very small income which means that my FSCS payment will be a percentage of almost nothing.

    This will be enough for me to live on but little else. I will investigate other employment options outside of financial services.

    At the end of 2013 once the dust has settled on RDR and the FSCS I will see what is left of my business. Very little I suspect. I will then refuse to pay all fees and levies and let them suspend my permissions. This is a far easier and cheaper way to de-authorise than the official process.

    Maybe if we all do this then the regulators will realise what a mess they have created.

  14. What concerns me is not only do we have to have an ‘open cheque book’ but that advisers are going like ‘snow of a ditch’.
    What I would like to know is who is paying for this?
    Why has the financial press not looked at this effect of RDR.
    FSA say that all advisers will be ready for RDR but How many advisers were there in 2006, 2007, 2008, 2009, 2010, 2011, 2012 and anticipated 2013 – 2014. This would tell the real story of the effect of regulation and we could see how increasing costs are distributed across a declining IFA base. This would indeed show up the real effect of the FSA on advice. Its an elephant in the room that no-one has addressed.

  15. There are so many elephants there’s not much room for anything else!

  16. Re Mike, bang on, there are only 7400 AR’s left, down from 33000 4 years ago.
    The sad thing is the IFA’s left are going to have to pick up the ever increasing Bills for the ones that have deauthorised.
    It is a whole weight off my mind being deauthorised this month in order that I won’t be picking up the tab. Nothing to do with qualifications, just I don’t want to worry about big bills comming my way which I have no control of or responsibility for

  17. I will shortly achieve Chartered Status. Why did I bother ?!!! 20 years experience, no complaints, CPD up the ying yang and loads of exams – all for nought !!! And yet the FSA quangocrats, largely responsibe for the credit crunch and most of the failures within Financial Services, remain in their fancy offices, picking up their ludicrously undeserved salaries, accruing their gold-plated pensions, for doing f**k all of use to man or beast.

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